Mutual Fund Bill Is No Response

Four-hundred-and-eighteen-to-two votes, like the one yesterday in the House of Representatives approving mutual fund legislation, are inherently suspect. If there were really content to the bill, there would be at least a few lawmakers fighting against it.

<br /> <script language="javascript" src="/scripts/packages/mfunds.js"></script></p> <p>
The bill dubbed Mutual Funds Integrity and Fee Transparency Act, which passed after 40 minutes of debate, was said in various news reports to "address" or "respond to" the scandal or "spate of scandals" that have "rocked" the mutual fund industry in recent months. It does this by compelling fund companies to give mutual fund investors a more detailed list of fees and require managers to disclose their personal holdings in funds they manage. The bill also would require two-thirds of mutual fund directors to be independent, up from a 50% requirement under current Securities and Exchange Commission rules.

There is reason to believe that almost none of these statements, however innocuous they seem, are true. First, the bill was introduced by Rep.
Richard
Baker
Richard Baker
, a Louisiana Republican, on July 11, before the fund scandal broke. So it can't really be deemed a response. Second, in substance it's not a response either. Not even a more detailed list of fees would reveal the specific market timing or late trades that are the substance of the scandal. Knowing that a fund manager holds shares in the fund he or she manages wouldn't help either. (It might be interesting, though, for other reasons.) Finally, adding more outside directors might be a good idea, though it's doubtful they'd be combing trading records. (Just what does an outside director of a mutual fund do anyway?)

The bill now moves to the Senate, but that body is not expected to consider it before the end of the year. Some lawmakers complained that the legislation did not go as far as the regulatory package that U.S. Securities and Exchange Commission say they will adopt soon without the benefit of legislation.

<script language="javascript" src="/scripts/commentary/dackman.js"></script><br />
Other aspects of the bill might provide some interesting news about fund managers, just a third of whom manage to beat the market averages. Funds will have to disclose their compensation, which will likely provide a few shockers, but which will have nothing to do with improper trading. Funds will be required to have "chief compliance officers" reporting directly to the independent directors, which will raise costs if new people are hired. They will need internal compliance procedures and protections for whistleblowers, which would be great if there were any whistleblowers.

The legislation would ban short-term trading by fund insiders, which is largely irrelevant to the instant scandals, most of which involved trading by outsiders, albeit favored outsiders. It would permit funds to charge a redemption fee for short-term trading that is higher than the current maximum of 2%. This would penalize such trading whether or not it's based on market timing and would seem to open at least a side door to higher, not lower, fees.

It's not clear how large or small the current scandal is. It's not clear if significant profits were made. If market timing is a major issue, simply having a rule that bars taking a profit from extremely short-term trading in mutual funds would solve it, without adding to the cost structure of mutual funds to the fees mutual funds charge their investors.

No one in the debate spoke against the measure. Two House members
Jeff
Flake
Jeff Flake
of Arizona and
Ron
Paul
Ron Paul
of Texas, both Republicans, voted against it. Efforts to reach these dissidents to find out what they have against transparency and integrity were not immediately successful.